India central bank hikes cash reserve ratio 0.5 point

V.Phani Kumar

HONG KONG (MarketWatch) -- India's central bank moved to contain inflationary pressures Tuesday by increasing the amount of money banks must keep on hand and removing the limits on the amount of money it can pull out of the economy.

The Reserve Bank of India Tuesday raised banks' cash reserve ratio half a percentage point to 7 percent, effective August 4. It also removed the ceiling of 30 billion rupees ($741.7 million) that it can drain from the banking system through its daily reverse repo auctions, effective August 6.

It was the third time this year the Reserve Bank of India has raised the cash reserve rate.

"Liquidity was a major challenge for the RBI, and with these measures, it is sending out a clear message that liquidity will be managed," said D.K. Joshi, principal economist at ratings agency Crisil in Mumbai. Joshi said the CRR hike was likely to drain 150 billion rupees from the banking system.

"These measures will also give the RBI some play in the forex market," added Joshi. Strong foreign fund inflows have contributed to India's money supply and strengthened the rupee against major global currencies recently.

Separately, the RBI also left its borrowing rate, or reverse repo rate, unchanged at 6% and its lending rate, or the repo rate at 7.75%.

"Holding inflation within 5.0 per cent in 2007-08 assumes priority in the policy hierarchy," said the RBI in a statement.

Data released last week showed that India's inflation for the week ended July 14 fell to 4.41% from a two-year high of 6.7% in January this year.

The central bank retained the country's economic growth estimate for the current financial year at 8.5%.

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